797/CBDT. - Income Tax - 797/CBDT

INSTRUCTION NO. 797/CBDT Dated : November 23, 1974 Section(s) Referred: 80O Statute: Income - Tax Act, 1961 With the twin objective of encouraging export of Indian technical know-how and the augmentation of the foreign exchange resources of the country, section 80-O of the IT Act, 1961 provides for concessional tax treatment in respect of income by way of royalty, commission, fees or any similar payment received from the Government of a foreign State or a foreign enterprise, subject to the satisfaction of certain conditions laid down in the said section. 2. The following points should, inter alia, be kept in view by the Income-tax Officers in dealing with any claim for deductions under section 80-O:- (i) Deduction is available only in respect of income by way of royalty, commission, fees or any similar payment. (ii) Further, such income should be received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside Indian of any patent, invention, model, design, secret formula or process or similar property right (hereinafter referred to as 'technical know-how' or information concerning industrial, commercial or scientific knowledge, experience or skill (hereinafter referred to as 'information) made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee or in consideration of technical services rendered or agreed to be rendered outside India, to such Government or enterprise by the assessee. (iii) By virtue of the amendment made by section 9(b) of the Finance Act, 1974, the benefit of section 80-O will, with effect from the assessment year 1975-76 be available to Indian companies only. Thus, the benefit of section 8O--o will be available to assessees resident in India, who are not Indian companies, for the assessment years 1972-73 to 1974-75 only. (iv) By virtue of section 80_O (2) deduction under section 80-O will be admissible in the case of an assessee other than a company or a cooperative society only if the accounts of the assessee for the relevant previous year have been audited and an audit report is furnished in form No.3-C as required by rule 6-AB of the Income-tax Rules, 1962. (v) The technical know-how, information or technical services referred to above should be provided in this behalf. Upto 31.3.72, section 80-o provided that the agreement should have been approved by the Central Government in this behalf. After 31.3.72 the approval has to be accorded by the Board. Approvals granted by the administrative Ministries of the Central Government to any such agreement on or after 1.4.72 will not meet the legal requirement of section 80-O; if in any case, a claim is made before the ITO on the basis of an approval granted after 31.3.72 not by the Board but by a Ministry of the Central Government, such a claim should not be accepted by the ITO and the matter referred to the Board. (vi) Recently, a case has come to notice where deduction was allowed under section 80_O, though the agreement had not been approved either by the Central Government or the Board. There is no reason why such a mistake should have occurred. No deduction under section 80_O should be allowed unless the ITO has received the Board's approval order from the Commissioner of Income tax. If an assessee produces his copy of the order of approval by the Board but the ITO has not received his copy from the Commissioner, the matter should be referred to the commissioner/Board. (vii) The order of approval issued by the Board provides, inter alia, that the grant of deduction will be subject to the assessee fulfilling the other conditions laid down in this behalf and the actual amount eligible for deduction will be determined by the ITO, at the time of assessment. The ITO should, at the time of assessment, look into the genuineness of the agreement and the reasonableness of the claim. Where the ITO finds that the approval has been obtained by fraud or misrepresentation, or any terms of the agreement are enlarged, modified or rescinded after the grant of the approval by the Board, the facts should be forthwith brought to the notice of the Board and the claim of the assessee kept pending till the matter is examined by the Board. (viii) The deduction under section 80_O of the Act has to be allowed from the "gross total income" which, in terms of section 80_B(5), means total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 280-O. As such, the amount allowable as a deduction under section 80-O would be only the net income (computed after accounting for admissible expenses incurred whether within or without India) to the extent it is included in the gross total income. In this connection, reference is also invited to the Gujarat High Court's decision in the case of Additional Commissioner of Income tax vs. Cloth Traders (P) Ltd., Ahmedabad, reported in "Taxation" of March 1974 at page 95. (ix) It is equally important to ensure that the concession under section 80-O is not abused by an assessee by claiming a higher deduction of net income under section 80-O by minimising the expenses relating to the activities covered by section 80-O and diverting a part of those expenses to other incomes which do not enjoy any tax exemption. The deduction to the granted under section 80-O (including the allocation expenses against such income should be quantified by the ITO with approval of the Inspecting Assistant Commissioner who may, in suitable cases, consult the Commissioner of Income-tax. (x) The claim for deduction under section 80-O should be dealt with in detail in a separate and self-contained paragraph in the assessment order rather than dealing summarily with the claim, as for example by saying "deduction allowed under section 80-O as claimed by the assessee". (xi) In the case of composite agreements, the deduction would be admissible only in respect of that portion of the income which is attributable to the provision of technical know-how or information or technical services which are covered by section 80-O. for example, if an Indian resident X enters into an agreement with a foreign enterprise Y which provides for payment of $5,00,000 by Y to X as under:- (a) $ 4,50,000 for the supply of machinery and equipment by X; (b) $ 20,000 for some services rendered in India; and (c) $ 30,000 towards rendering of technical services outside India. The payment which will qualify for consideration is only the last named, viz., $ 30,000 being the payment for the only activity covered by section 80-O of the Act. Further the actual amount of deduction out of $ 30,000 will be the net income computed after allowing the expenses as indicated in sub-paras (viii) and (ix) above and to the extent it is included in the gross total income. (xii) Upto and including the assessment year 1971-72, deductions under section 80-O was admissible if the income in question had been received from a foreign company only. In this connection, the definition of the term "foreign company" in section 80-B(4) (read with the definition of the term "domestic company" in section 80-B(2) should be seen. Before a foreign party can be considered to be a foreign company, it must be a "company" covered by the definition of that term as given in section 2(17). Upto the assessment year 1970-71, a foreign institution, association or body could not be regarded as a 'company' unless it had been declared to be a 'company' by an order of the Board (or it was assessable or was assessed under the Income Tax Act, 1922, as a company for the assessment year 1947-48). From the assessment year 1971-72, any body corporate incorporated by or under the laws of a country outside India is regarded as 'company' and no declaration by the Board is necessary. But any other institution, association or body, whether incorporated or not, can be regarded as a company only if it has been declared by the Board to be a company (unless it is or was assessable or was assessed as a company for any assessment year upto 1970-71). Attention in this connection is also invited to paragraphs 60-64 of Board's Circular No.72 explaining the provisions of Finance (No.2) Act, 1971. In view of the foregoing, all cases where deduction under section 80-O has been allowed for any assessment year upto and including the assessment year 1971-72 and where the foreign concern is not a "foreign company" within the technical meaning of that term, need to be reviewed carefully and urgently to withdraw the tax concession in cases where it has been wrongly allowed by treating the foreign party as a foreign company. (xiii) Recently, section 80-O has been amended by the Finance Act. 1974 and the deduction would be admissible only if such income is received in the relevant 'previous year' in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India during the relevant 'previous year' by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange. As this amendment has been made effective retrospectively from 1.4.68, immediate action needs to be taken to withdraw the relief where it has been wrongly allowed in the past because the conditions mentioned above were not fulfilled. In this connection attention is also invited to section 155(12) of the IT Act, section 17 of the Finance Act, 1974 and the instructions contained in paragraph 30 of Board's Circular No.138 dated 17.6.74. (xiv) The expression "convertible foreign exchange" has been defined in the Explanation to section 80-N to mean foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purpose of the law for the time being in force for regulating payments and dealings in foreign exchange. This definition also applies for the purposes of section 80-O of the Act. The RBI has since clarified that the following currencies are treated by them as convertible foreign exchange with effect from the dates shown against them for the purposes of regulating payments and dealings in foreign exchange: If deduction is claimed in respect of income received in the above mentioned currencies from dates prior to the dates mentioned against them or in a currency other than the currencies mentioned above, the assessee may be asked to produce a certificate from the RBI that the amount was received in convertible foreign exchange, before the claim for deductions under section 80-O is allowed. 3. With a view to having centralised statistics regarding the deduction allowed under section 80-O of the Act, the ITOs should, at the end of every quarter, intimate the details regarding such deductions in the proforma given in Annexure-I, to the CIT concerned. The CITs will maintain a register from which consolidated information on this subject will be available, as and when required. 4. Section 80-O replaced section 85-C with effect from 1.4.68. There have been several amendments in section 80-O from time to time, and for the sake of facility, the important features of this section from year to year are summarised in the Chart given in annexure-II. 5. These instructions may please be brought to the notice of all the officers working in your charge. The Board desire that all cases where deduction has been allowed under section 80-O of the Act should be reviewed immediately in the light of these instructions and remedial action taken wherever necessary. A report may please be sent to the Board by 15.4.75.